Customs Duty and Penalty Defense (19 U.S.C. 1592)

It's always important to retain qualified counsel as soon as you are aware of a significant compliance problem, as can help to forestall the possible imposition of civil penalties by a government agency. If such an issue is brought to counsel in advance, counsel may have time to make legal disclosures which partially or entirely shield a company from penalties. Alternatively, counsel may develop and interpose legal defenses or take actions to mitigate the limit the consequences of the violation. If a penalty action is brought against a company, experienced counsel may be able to develop adequate defenses. Further, mitigation and settlement of penalty actions may be appropriate.

The most common type of Customs penalty actions have historically involved the application of Customs' negligence/fraud statute, 19 U.S.C. § 1592. Under that statutory provision, the government is entitled to recover duties and fees accrued over a period of 5 years of import shipments (notwithstanding the likely liquidation of underlying entries), plus civil penalties of 2 times the loss of revenue (under a theory of simply negligence), plus interest accruing. In instances of gross negligence the government applies a multiple of 4 times the loss of revenue. If there is no actual loss of revenue, then the government may calculate penalties based on a percentage of the dutiable value of the merchandise (20% for simple negligence and 40% for gross negligence). In cases involving civil fraud, the civil penalty is limited to the domestic value of the subject merchandise.

Based on these criteria, the liabilities over 5 years of imports can be sizable and may even threaten the continued viability of a business. In instances, where a company is unable to pay such claims, Customs has in many past instances attempted to pierce the corporate veil in order to reach the personal assets of the owners. See, e.g., United States v. Golden Ship Trading, 22 CIT 950, 953 (not reported in F. Supp. 2d) (1998); United States v. Matthews, 533 F. Supp. 2d 1307, 1313-14 (Ct. Int’l Trade 2007). C.f., United States v. Trek Leather, CIT Slip Op. 11-68 (June 2011), reversed CAFC (2013), vacated, pending en banc rehearing (2014.)

Other Import Related Penalties

Other penalty provisions are also applied by Customs including most commonly, § 1595(a) penalties for the introduction of merchandise contrary to law (this typically includes merchandise violating various laws (including the IPR laws as "counterfeits" or "confusingly similar" trademarks and copyrights); and § 1641 Customs broker penalties. Other less common penalties include § 1584(a)(2) for the failure to manifest drugs, § 1593A for drawback violations, § 1509 for recordkeeping violations, § 1466 for vessel repair violations, § 1436 for arrival reporting violations, § 1584 for manifest violations.

Penalties under the False Claims Act

Another legal cause of action is the False Claims Act, which is provided for under Title 31 of the U.S. Code in sections 3729 - 3733. The FCA provides liability against any person who, among other things:

(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;

(B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim;

See, §§3729(a)(1)(A) & (B).

In the context of an import transaction, such a false claim might, for example, consist of filing for accelerated drawback knowing that the goods do not qualify, and therefore that the refunds are inappropriate.

Under §3729(a)(1)(G), the FCA provides for what is termed a "reverse-false claim":

(G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government,

This section imposes liability where one acts - not to obtain a refund - but rather to avoid having to pay money to the government. This is more commonly the case in import transactions where goods may have been allegedly misclassified, misvalued, or otherwise mis-declared (perhaps to avoid ADD/CVD liability).

The act includes liability for knowingly causing another person to submit a false claim to the government. In 1986, Congress increased the damages from double to treble damages. Congress also raised applicable penalties from $2,000 to a range between $5,000 and $10,000.

Relators ("whistleblowers" and "informants") are provided certain rights under the FCA, which include a private right of action, and to obtain individual compensation. For example, in a government prosecution, the relator might be provided between 15 and 25 percent of the amount recovered by the government.

While the FCA is less commonly employed as an enforcement tool by U.S. Customs, it is often the prefered choice of the U.S. Department of Justice. FCA cases are often lengthy and document intensive.

Export Penalties.

According to the Export Administration Act of 1979, as amended (EAA), 50 U.S.C. app. §§ 2401-2420 (2000), persons who violate the EAR may be subject to both criminal and administrative penalties. When the EAA is in effect, the criminal penalties can reach 20 years imprisonment and $1 million per violation, and the civil penalties can reach $11,000 per violation, ($120,000 per violation in cases involving items controlled for national security reasons). In addition, exporters can face debarment, temporary denial orders, and section 11(h) denials. Further, individual liability to corporate officers may be imputed.

Under OFAC regulations, the government has the authority to impose civil penalties for violations at various thresholds:

violations under IEEPA are assessed at $250,000 or or twice the amount of the underlying

transaction, violations under the TWEA are assessed at $65,000,

violations under the Iraqi Sanctions Act are assessed at $325,000,

violations under the Foreign Narcotics Kingpin Designation Act are assessed at $1,075,000,

violations of the banking transactions under the Antiterrorism Act are assessed at $55,000

If you receive an administrative demand for information from OFAC (called a “602 letter”) requesting an explanation of the transaction, we advise you to retain counsel. If not satisfactory, your response will likely be referred to the Civil Penalties Division for the issuance of a “Prepenalty Notice” citing the violation and stating the amount of the proposed export penalty. At this point, the exporter then has thirty days to make a written presentation as to why a penalty should not be imposed.

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